Buy-to-let investors reneging on off-plan property purchase contracts need to be aware that they risk losing more than just their deposits, warns City law firm Wedlake Bell.
It said hundreds of buy-to-let investors have already been pursued through the courts for trying to wriggle out of off-plan contracts.
During the house price boom many buyers decided to buy a new build property before construction was completed but a predetermined price. They hoped that by the time the build was completed a year or two later, the value of the property would have risen.
But prices have fallen sharply and many new builds are worth far less than the agreed price. Some investors who had bought property off-plan are trying to avoid completing if they feel they are no longer getting a good bargain.
The problem has been made worse by banks pulling 90 per cent mortgage deals and refusing to lend the buyers enough to complete on the original deals.
Wedlake Bell says that a string of recent judgments confirms that buy-to-let investors must actually purchase the property they are contracted to rather than just forego their deposit seems to have come as a surprise to many investors.
Jeremy Raj, head of residential property, Wedlake Bell said: "There is a worryingly widespread and entrenched belief among buy-to-let investors that if they decide to withdraw from a purchase for which they have exchanged contracts that only their deposit is at risk."
"The legal position is quite clear. They are legally obliged to complete on the transaction. Damages are not even restricted to the difference between today's market price for that property and the price they contracted to purchase at."
Mr Raj says that for investors the most painful scenario is that the court requires them to complete on the purchase and they have no funding in place.
He said: "Buy-to-let investors who cannot complete on their deals because they have not put in place funding may ultimately face debt recovery measures.
"Developers don't want to pursue investors for damages they simply want to complete the sale as contracted."
According to the law firm the number of buy-to-let investors who have had judgments against them are now numbering in the hundreds. These court judgments are enforceable in Ireland as well as many other jurisdictions.
Mr Raj said that no commercial organisation wants to enter into litigation with its customers but that developers have a legal obligation to protect the financial interests of their shareholders.
"Developers will also have their own supply chains that they need to pay and in some instances they will be funded by bank lending that requires them to keep to their sales programme and sales prices."
"As the law in this area is so clear, it is in an investor's interests to reach a settlement with developers before a court ruling as that ruling, in itself, may impact on the individual's credit rating."
Published in the Telegraph, 8 September 2009